Definition

According to the United States National Bureau of Economic Research, it is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales ." Economic recession is a contraction phase of the business cycle. The common definition for recession is that there is a relative decline in a country's gross domestic product or GDP. Having a negative real economic growth for two or more successive quarters is also a telltale sign for economic recession. Gross domestic product is the market value of all the products and services produced in a region or commonly, country, in a year. GDP is the total output of the economy. Since the gross domestic product or the output is declining. Firms and companies will sever their ties with several employees resulting to unemployment. A severe or long recession could be an economic depression. The difference between recession and depression is when the GDP is declining by 10%, that means what the economy is experiencing is already depression. A short lived recession is often called economic correction.

Economists may argue with the definition of an economic recession. They may even debate whether the United States, specifically is experiencing an economic downturn. But it is not only the economists who can decide and identify an economic downfall; it is the ordinary people who can readily identify economic growth and demise.

Background of the Global Financial Crisis; What is it all about?

It all began with the one and all American dream, that every American should have a home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in a boom, and financial agents thought that there wasnt a better time to give away loans. The Household sector was given a boost with increased monetary supply by commercial financial companies, and people were given loans regardless of the credit rating they received. It was never expected that the boom in the Real Estate business would come to such an abrupt end, and the prices would reach all time low. The US economy being a capitalist driven economy didnt bother to indulge itself in the policies pursued by the then prominent

financial giants. Gradually these financial giants in this business started feeling the heat as sub-prime clients started defaulting in their repayment of loans. The properties which were mortgaged by the clients werent even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving short term goals and ignoring warnings from leading economists about long term sustainability of the policy, backfired completely and companies like Lehmann Brothers, Merill Lynch, Freddie Mac and Fannie Maes bad assets reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occurring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreased and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%. The US governments realized the gravity of the situation, and started using monetary as well as fiscal policies to check the diminishing economy. Fiscal policy boost in the way that, an amount of around US$ 1 trillion was pumped into the economy to increase the liquidity scenario. The financial companies which filed for bankruptcy were nationalized, or there non-performing assets were accounted for by the government. The Federal Bank of US also lowered the monetary policy rates, like Statutory Liquidity Ratio (SLR), relating to the amount of money required to be deposited by commercial banks to the Federal bank, so as to have some check on the sky high interest rates. These policies which were targeted to cushion the huge credit shortage scenario has taken somewhat affect and the situation has stabilized a bit. But, as leading economists say, it is too early to comment on whether the trough of the graph has reached or not, or it is still the tip of the iceberg scenario. This fear is out there still because there is uncertainty over how many more sub-prime creditors are still there in the economy, and how many more companies will get affected

by the fallacious policy, which was followed by short-sighted profit oriented companies.

Impact on the Indian Economy

The financial crisis in the US, slowly snowballed to an economic crisis, with growth in the economy stagnating. Efforts have been taken by the US authorities to restore the fully functional markets, but theres an obvious time lag. Till then, the world economy has been affected by this deep economic crisis and India is no different. India being a net import driven economy, with exports (including the service sector) contributing 17% of GDP, is a little less vulnerable than other economies. Moreover we still have a socialistic pattern of economy where there is enough government intervention, which has somewhat checked the situation from becoming graver. At the present scenario it is a bit difficult to exactly quantify the implications of the global financial meltdown, but a few salient features are: Indian IT companies have around 30% exposure to foreign financial services. Funding constraints would result in uncertainty in the real estate sector. While direct exposure for financial institutions is negligible, but there are a few firms which have impact on its margin. Foreign Direct Investment and Foreign Indirect Investment have decreased dramatically with the liquidity crunch, with companies selling their stakes in a hurry. The rupee has significantly depreciated due to the outflow of foreign reserve capital. The Government of India and Reserve Bank of India accepted these challenges and took measures, discussed subsequently, to control the effects of the implications mentioned above. The holistic point of view is that it was imperative to improve the liquidity situation in the market as lack of liquidity led to the following effects:Lack of lack of money available to commercial banks for offering credit. Borrowing interest rates went up.

Industrial Sector deferred its investment plans. Decrease in Production. Appreciation in price of commodities. Inflationary trends. Consumption of Household Sector decreases. Government revenue in form of indirect taxes decreases. Fiscal deficit increases. So we have a glimpse of the downward spiral that affects the economy as a whole, i.e. the household, industrial, government and the foreign trade sector, and hence realize the urgency of the government and the apex bank to apply the controlling measures.

Role of Government in Recession

Recessions are generally believed to be caused by a drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. And all this is done through an economic bill called Stimulus

Package

Definition of Economic Stimulus

Economic stimulus is a term used by economists to define a situation where the government changes its fiscal policy of spending and taxation in order to bolster and revive an economy that is in a recession. By spending money on state and federal infrastructure, the government hopes to provide jobs, and jump-start the failing economy.

To understand what a stimulus bill is intended to do, one must first understand what causes an economic slowdown or recession--namely less spending. If people and companies spend less, they buy less, meaning companies produce less, meaning they need fewer workers, meaning they pay less or let workers go, meaning people have less money to spend and it starts all over again. In short, an economic stimulus bill is federal legislation that designed to inject money into the economy quickly so people spend it (rather than save it or pay off old debts neither of which generate new economic activity) thereby breaking the chain of less spending and restarting economic growth. There are a number of ways policymakers can try to do this.

1. Economic Stimulus Proposals

Generally, there are two ways for the federal government to put more cash into the economy -- spend more or tax less. Each of these methods has positives and

negatives and within each category there are a number of specific proposals that have demonstrated various levels of success. Spending proposals include direct payments to individuals such as the rebate checks most Americans received earlier this year. Other options include extending unemployment benefits, increasing food stamps payments and funding infrastructure projects like roads, schools and bridges. Tax proposals include reducing or eliminating the payroll tax, temporarily lowering tax brackets, reducing capital gains tax, lowering corporate tax rates and accelerating depreciation on capital equipment purchases so companies have an incentive to buy new equipment.

2. Economic Stimulus Bill Are Temporary

To be successful, any stimulus bill must be temporary since the goal is to shock the economy out of a downward trend and cause individuals and companies to change their behavior. That is why rebate checks are so popular as a stimulus tool, because it is money in peoples' pockets that they did not expect and, therefore, are more likely to spend.

3. History of Economic Stimulus Packages

Most of the in the US dont remember the tough times of the 1930s just following the stock market crash of 1929. The crash was characterized by mass unemployment. It was a time when most Americans couldnt earn enough money to provide for their families. People lost their lifes savings when the banks closed and were left on the streets when businesses and factories closed down. The New Deal of the thirties had much the same goals as the 2009 package. Road projects, dams and national parks projects were all infrastructure that appeared from those times. These projects provided jobs for the American families who desperately needed work, helped to increase the availability of

inexpensive energy and connected the country from coast to coast. Each of these results were long term and beneficial. One of the drawbacks of the projects was that families were broken apart when the job was geographically different than the workers residence.

4. Do Stimulus Plans Work?

Feelings are mixed, as to the effectiveness of the stimulus plan of 2008 and 2009. Our leaders are saying that the plan is working better than they expected and that it is more effective than was projected. People on the street are still waiting for it to affect them. With so many still out of work and still seeing their friends and colleagues joining the ranks of the unemployed the real questions are: when will it affect me? Only time will tell if the government officials have made the right call. It remains to be seen how long it will take before unemployment will turn around and peopel will go back to work. There are still questions as to how the banking industry will fair in the aftermath. We already know that consumer interest rates have risen and most credit companies have pulled back on the amount of available credit to their customers. The final lesson to learn from the collective mistakes of our economy is to make your own house operate on sound fiscal policy. Live within your means and limit your debt. If you can do this, you will be able to weather any economy, good or bad.

Economic Stimulus Package of 2008-2009

A stimulus package for the economy, was announced by the government and Reserve Bank, was a one-off assistance, but it was the first in the series of measures to help the sectors hit by the global slowdown. The economic stimulus package that our leaders passed in 2009 included a free check to each worker that amounted to $ 4. Billion. That was direct money given to individuals, but the package also made funds available to states to fund public works projects. Repair and expansion of roads, help for under funded education, small business loans and mass transit are just a few of the places the spending is being directed. A large portion of the stimulus package for business has been funding the bailout of failing banks, supporting auto manufacturers that were having reduced sales due to the lack of buyers and supporting companies that invest in cleaner energy and green technology. Another aspect of the stimulus plan included the creation of jobs. As of September 2009, there have been very few new jobs produced; much less than the promised 3.5 million jobs. While about 150,000 jobs were saved or supported by the stimulus package, unemployment rates have continued to climb to 9.6% at the time of this article and are projected to top 10% by the end of the year, 2009. The Commerce and Industry Minister, Kamal Nath said, "This will not be a single package. There will be a first package, second and third part of it." The RBI is also expected to announce a fresh round of rate cuts tomorrow, to lower the borrowing costs further. The central bank has already cut its benchmark short-term rate by 150 basis points to 7.5%. It has also reduced the CRR by 3.5% to 5.5%. Regarding the details of the stimulus package, prepared by the Committee of Secretaries in consultation with the RBI, Commerce Secretary G K Pillai said, "Let the Prime Minister announce it tomorrow." According to Pillai, Rs 15,000 crore budgetary support would be extended to the infrastructure projects, while sops worth Rs 2,000 crore would be extended to the recession-hit exporters.

Prime Minister Dr. Manmohan Singh , who has since taken the additional charge of the finance portfolio, chaired a meeting of the apex committee on December 2, to discuss the stimulus package. A government survey of 121 export-oriented manufacturing units indicated 65,000 job cuts in the last three months with worsening of the the global economic situation.

Highlights of India's fiscal stimulus package:

Amount : First Package US 4. billion (Rs. 20,000 crore) (the Indian News: 7 December 2008) The fiscal package, a modest one, was intended to keep the domestic demand high as well as to provide incentives to some selected export sectors. This included enhanced credit for exports, cut in excise duties, relief to the dooming housing sector and SMEs. According to the Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia, the package will, minimize the impact of weak global economy on the Indian economy and help achieve a 7% growth rate.

Monetary /Fiscal:
- A cut in interest rates by Indias central bank: The Reserve Bank of India reduced its repo rate, the rate at which it lends to commercial banks -to 6.5 percent, and its reverse repo rate - the rate at which it borrows overnight to 5.0 percent. - Interest subvention of two percent on export credit for labour intensive sectors - Additional allocations for export incentive schemes - Full refund of service tax paid by exporters to foreign agents - Incentives for loans on housing for up to Rs.500,000, and up to Rs.2 million - Limits under the credit guarantee scheme for small enterprises doubled

- Lock-in period for loans to small firms under credit guarantee scheme reduced - India Infrastructure Finance Co allowed to raise Rs.100 billion through tax-free bonds - Norms for government departments to replace vehicles relaxed - Import duty on naphtha for use by the power sector is being reduced to zero - Export duty on iron ore fines eliminated - Export duty on lumps for steel industry reduced to five percent The RBI also announced that it will extend a line of credit to small scale industries and housing finance banks: The government announced a cut in Centrally-imposed Value Added Tax by 4% to increase spending across-the-board To boost exports, govt. announced extra allocation of 70 million dollars. To boost infrastructure spending, the government authorized a recently created India Infrastructure Finance Co. Ltd to raise Rs. 10,000 crores through tax free bonds. The government also announced that initiatives are being taken to support Public Private Partnership programme of Rs. 100,000 core to the highway sector. To boost housing sector, public sector banks were urged to announce attractive home loan packages. The government decided to seek authorization for additional plan expenditure of upto Rs. 20,000 crore in the current year mainly for critical rural infrastructure and social security schemes such as Pradhan Mantri Gram Sadak Yojana, Jawaharlal Nehru National Urban Renewal Mission, National Rural Employment Guarantee Scheme, India Awas Yojana, Accelerated Irrigation Benefit Programme and National Social Assistance Programme. In the light of the decline in exports by 12%, the government has decided to subsidize this sector with an interest subvention of 2% upto March 2009 to pre

and post shipment export credit for labour intensive exports like textile, leather, marine products and SME sector.

Detailed Analysis
Plan, non-plan expenditure of Rs.300,000 crore (Rs.3,000 billion/$60 billion) in four months
Plan Expenditure for 2008-09 was placed at Rs.2,43,386 crore in the Budget Estimate. It had gone up to Rs.2,82,957 crore in the Revised Estimate. The additional plan spending of Rs.39,571 crore is on account of an increase in Central Plan by Rs.24,174 crore and an increase of Rs.15,397 crore in the Central Assistance to State and UT Plans. The Central Plan expenditure has increased for Rural Development, Atomic Energy, Telecommunications, Textiles, Urban Development, Youth Affairs and Sports and Railways. The increase in Central Assistance for State and UT Plans is on account of additional Central Assistance for Externally Aided Projects, Accelerated Irrigation Benefit Programme, Roads and Bridges, National Social Assistance Programme, Jawaharlal Nehru National Urban Renewal Mission and Tsunami Rehabilitation. On the Non-Plan side, the additionality of Rs.1,10,498 crore in the Revised Estimates is accounted for by an increase in the expenditure of Rs.44,863 crore on fertilizer subsidy, Rs.10,960 crore on food subsidy, Rs.15,000 crore on Agricultural Debt Waiver and Debt Relief Scheme, Rs.7,605 crore on Pensions, and Rs.5,149 crore on Police. An additional amount of Rs.9,000 crore has also been provided for Defence expenditure.

2. India Infrastructure Finance Co tax-free bonds:

Company Profile Of IIFCL:
India Infrastructure Finance Company Ltd (IIFCL) was established in January 2006 as a wholly owned Government of India company and commenced its operations from April 2006. India Infrastructure Finance Company Ltd (IIFCL) is providing long-term financial assistance to various viable infrastructure projects in the country. The authorized capital of the company is Rs 2000 crs and the PaidUp capital is currently Rs 1000 crs. Apart from the equity, IIFCL is planning to raise long-term debt from the domestic market, bilateral and multilateral institutions and in foreign currency through external commercial borrowings (ECBs). The borrowings of the company are backed by sovereign guarantee The global meltdown has led to recessionary scenario in the country. To beat this blues government is significantly increasing spending on infrastructure with stimulus packages announced. Now the focus is on rapidly implementation of the programs and projects. However due to global financial crisis infrastructure

financing has been badly hit firms executing projects dont have the equity, and those that were smart or lucky enough to have raised equity earlier are finding it difficult to raise debt. Banks, which have the money to lend, are wary of an assetliability mismatch. Hence the government is focusing on strengthening and refinancing of India Infrastructure Finance Company Ltd. (IIFCL) to drive the economic growth. IIFCL was created in April 2006 with Rs. 100 crore of capital. It has been promoted by the Centre to provide long-term finance to infrastructure projects directly as well as to banks and financial institutions for loans of a tenor exceeding, 10 years, will be the lead fund arranger for these projects. Within the short time since its inception IIFCL has emerged as a nodal agency for financing infrastructure projects. It has sanctioned $3.7 billion of financial assistance to 101 infrastructure projects which have a project cost of over $29 billion - no other financial intermediary in the country has lent as much in such a short time. Almost 90 infrastructure projects have already achieved financial closure because of IIFCL

Stimulus to the IIFCL:

In order to boost investment in the infrastructure sector, the government authorized the state-run India Infrastructure Finance Co. Ltd (IIFCL) to raise Rs.100 billion through tax-free bonds by March 2009 . Announcing a Rs.3,000-billion ($60-billion) stimulus package to pump prime the economy, a government statement said IIFCL, set up to finance infrastructure projects in the country, could use the fund to refinance port, highway and power projects, being developed under the public-private-partnership model. Speaking of the stimulus package, Planning Commission Deputy Chairman Montek Singh Ahluwalia told reported that around 60 highway projects and several power and port projects were now being cleared by the government. These projects may experience difficulty in reaching financial closure given the current uncertainties in the financial world. The bond funds will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects, he

said. Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds, the government said.

Tax Benefits Notification

These bonds carry a tax-free status as per Notification No. 09/2009 issued by Government of India, Ministry of Finance, Department of Revenue, and Central Board of Direct Taxes on 7th January 2009. The same is published in the Gazette of India, Extraordinary, Part II, Section 3, Sub section (ii). However the bondholders are advised to also consult their own tax advisor on the tax implications of the ownership and sale of bonds, and income.

Features Of The Issue:

Infrastructure Bonds, India were available through issues of ICICI and IDBI, in the name of ICICI Safety Bonds and IDBI Flexibonds. They reduced tax liability by upto Rs 16,000 per annum. Both the Infrastructure Bonds, India had provided investors the option of purchasing and holding the instruments either as physical certificates or in the demat form. The Tax-Saving Bond from ICICI for the month of July 2001 provides two options: Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually Deep Discount Bonds with a face value of Rs 6,600. These bonds are available for Rs 5,000, and are issued for 3 years and 4 months, after which they are redeemed at their face value. These infrastructure bonds are suitable for an increase in the investment. The terms for the IDBI Bonds are similar also. Apart from the above Infrastructure Bonds India, Rural Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds for investors seeking to utilize the additional Rs 30,000 qualifying limit for investments in Infrastructure Bonds, India. Infrastructure Bonds, India do not offer any protection against high inflation since

the rate of interest they offer is pre-determined. Against Infrastructure Bonds, India by pledging them with a bank one can borrow from banks. The amount depends on the market value of the bond and the credit quality of the instrument. Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back

Terms of Issue
Issue Size: Rs Rs 1000 crs with the option to retain oversubscription upto Rs 2630.7 crs. Opening Date: 18th Feb 2009 Closing Date: 6th March 2009 Instrument/ Facility - Unsecured Redeemable Non Convertible Tax-free Bonds in the nature of promissory notes. Issue Price - At Par (Rs.1,00,000 /- per Bond) Redemption Price - At Par (Rs.1, 00,000/- per Bond) Tenure 5 Years Minimum subscription 10 Bonds (Rs 10 lakhs) and then in multiple of Rs 1 bonds (Rs. 1 lakhs) Coupon Rate 6.85% tax free payable annually (Pre Tax Yield (10.37%) Listing - Proposed on the Wholesale Debt Market (WDM) Segment of the 5Bombay Stock Exchange Ltd. (BSE). Type of Eligible Investors: 1. Resident Indian individuals; 2. Scheduled Commercial Banks; 3. Financial Institutions; 4. Insurance Companies; 5. Primary/ State/ District/ Central Co-operative Banks (subject to permission from RBI); 6. Regional Rural Banks; 7. Mutual Funds;

8. Provident, Gratuity, Superannuation and Pension Funds; 9. Companies, Bodies Corporate authorized to invest in bonds; 10. Trusts & Societies registered under the applicable law

Analysis Of Stimulus to IFCL: On Profits & Working of Company

Profits (crore) 160 Profir in Crore 140 120 100 80 60 40 20 0 2007 2008 2009 2010 Year Profits (crore)

The company had a net profit of Rs 14.10 crore in the previous fiscal. income of the company during 2008-09 increased over five-fold to Rs 634.86 crore, the company said in a statement. However, the total expenses increased from Rs 86.67 crore to Rs 485.15 crore, mainly on account of cost of borrowings. Hence the profit for the year 2008-09 stood at 82 crore.

On The Working Of the company

IIFCL since its inception in 2006 has sanctioned Rs 18,714 crore to 108 infrastructure projects. Financial Performance (FY 2008-09) IIFCL has been earning Net Profit from the first year of its operations. The company has continued its strong growth during the subsequent years which is reflected in its improved financial performance. Non-performing Advances (NPAs) were NIL% Net Worth increased from Rs8.29 billion to Rs14.34 billion Profit Before Tax increased by 344% from Rs0.34 billion to Rs1.51 billion Provision for Standard assets increased from Rs 0.07 bn. to Rs 0.13 bn. Infrastructure reserve improved from Rs0.08 billion to Rs0.17 billion Profit After Tax grew by 396% from Rs0.14 billion to Rs 0.70 billion

Benefits to investors:
By Infrastructure Bonds India or Tax-Saving Bonds an investor can save on taxes as provided under Section 88 of the Income Tax Act, 1961. The two significant economic factors playing vital role in the investment decisions of Infrastructure Bonds India are Inflation and interest rate movements. For instance, price of a bond will fall if interest rates rise and vice-versa.

3. Ad valorem central value-added tax

A four percent cut in central value-added tax to help corporate India in general and sops for exporters, housing, infrastructure and textiles sectors were all part of the package to stimulate growth , which was personally

overseen by Prime Minister Manmohan Singh, who now also holds the finance portfolio. A four percent reduction in CENVAT means price of each product will comedown by four cent and car prices came down by four cent . To provide a fiscal stimulus to the economy through stimulation of demand and relief to the manufacturing sector, Government has carried out certain changes in Excise and Customs duty rates. Some changes have also been made in respect of Service tax refund scheme for exporters. The details of these changes are as under:

The three major ad valorem rates of Central Excise duty viz. 14%,
12% and 8% applicable to non-petroleum products have been reduced by 4 percentage points each. The revised rates will be 10%, 8% and 4% respectively. 1. Cars, other than small cars, attract composite rates that are a combination of specific and ad valorem rates. The rates applicable hitherto were 24% + Rs.15,000/-` per unit for cars of engine capacity 1500 cc to 1999 cc and 24% + Rs.20,000/-` per unit for cars of engine capacity of 2000 cc or more. The ad valorem component of these rates has been reduced from 24% to 20%.

2. In the case of cement, which attracts either the ad valorem rate of 12% or specific rates (Rs./metric tonne) depending upon the retail sale price, the specific rates have also been reduced in the same proportion as the ad valorem rate. Further, the concessional rates for cement produced by mini-cement plants have also been reduced proportionately. Bulk cement would now be chargeable to either 10% ad valorem or Rs.280/- per tonne, whichever is higher. 3. The rate of duty on cotton textiles and textile articles has been reduced from 4% to Nil. Stimulus package included an interest subvention of two per cent up to March 2009 for pre and post-shipment export credit for labour-intensive exports (textiles, leather, marine products) and SME sector. Seeking further help from the Government, the Clothing Manufacturers Association of India has asked for two per cent interest subvention, removal of income tax on exports, an increase in duty drawback rate and changes in the labor law. In an effort to increase India's share in the world textile market, the Government has introduced a number of progressive steps. 100 per cent FDI allowed through the automatic route.

 Technology up-gradation Fund Scheme (TUFS) which was launched to facilitate the modernization and up-gradation of the textiles industry in 1999 has been given further extension till 201112. Scheme for Integrated Textile Park (SITP) has been started to provide world class infrastructure facilities for setting up textile units through the Public Private Partnership model No change has been made in the excise duty rates on petroleum products, specific rated items and tobacco products. Notification No.58/2008-Central Excise and Notification No.59/2008-Central Excise, both dated 07.12.2008 have been issued in this regard.

Analysis of cut in CVAT:

1. On Automobile Industry:
The measures immediately resulted in several automobile companies cutting prices by four percent, as the reduction in value-added tax alone will ensure that every product becomes cheaper by at least four percent. Owing to CENVAT rate cut by Government of India, car makers are set to cut the prices of their models. Maruti Suzuki , Tata Motors, GM India and Mahindra & Mahindra announced that they would pass on the entire benefit of the four per cent cut in Central Value Added Tax to the consumers. The ad valorem components of large cars have been reduced from 24 per cent to 20 per cent. In case of small cars, the ad valorem component has been reduced to 8 per cent from 12 per cent. The companies had passed on the benefit across products passenger and commercial vehicles. This helped in increasing the demand.

Sale of Automobile:
Manufacturer
Four Wheeler Marauti Suzuki Hyundia Motors Tata Motors (M&M) Mahindra Two Wheeler Hero Honda Bajaj Auto

Sep-09
83,306 53,804 52,531 26,921

Growth Sep-08 rate

71,000 46,218 49,647 22,729 17.30% 16% 5.80% 18.40%

401,290 249,795

385,262 218,494

21.70% 14.30%

Sale of Automobile India

90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Marauti Suzuki Hyundia Motors Tata Motors (M&M) Mahindra Hero Honda Bajaj Auto 26,921 40,129 83,306

53,804

52,531

Sep-08 Sep-09 Growth rate

24,980

Units

Manufacturer

2. Cement: The Government has announced a 2 per cent cut on the excise duty of bulk cement; this taken with the earlier 4 per cent cut in excise duty, brings the duty on bulk cement to 8 per cent now With the reduction in excise duty on bulk cement effective from Wednesday, the cement industry, though still working out the impact, has said that the benefits of the cuts will be passed on to the end consumers. Duty cuts for cement to reduce cost of construction s. With the latest excise cut, bulk cement was at par with trade cement with a flat excise duty of 8 per cent. The duty cut on bulk cement, which constitutes around 8-10 per cent of the entire cement sales in the country, will bring down the taxes from Rs 290 a tonne to Rs 230. Amrit Lal Kapur, managing director of Ambuja Cements , said, "Excise duty on bulk cement is levied on the negotiated contract prices between the producers

and the buyers. This way, the entire reduction will automatically be passed on to the end consumers."

Hari Mohan Bangur, CMD of Shree Cement and president of the Cement Manufacturers' Association, said, "The industry will pass on the entire duty cuts to the consumers. The last fortnight had seen prices firming up by Rs 2-5 a bag, but now with the latest duty cuts, prices would come down." North-based Shree Cement is one of the largest cement makers operating in the bulk cement category.

Production & Price inc. Of Cement 2008-09

14

12

10

YoY % increase

Production Price

0 Mar08 Apr- May- Jun08 08 08 Jul08 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar08 08 08 08 08 09 09 09

Time

3. Textile:
The stimulus package announced by government recently has been totally disappointing as far as textile and clothing industry is concerned. The cut in excise duty and service tax will had marginal impact on the countrys textile industry. While textile makers gained from the cut in service tax, they had not gained much from the excise duty cut as most of them dont pay any excise, except on some inputs and machinery. Theres not much impact on textiles, except for savings on inputs like dyes and chemicals, spare parts or machinery. There was savings on their purchase, said Jayesh Shah, CFO, Arvind Mills. But no one is investing in capacity expansion. Theres no excise duty on cotton textiles though synthetic textiles (polyester yarn or fibre) attract an excise duty of 4 per cent but the same has not been impacted as the duty has been cut on items that currently attract excise of 10 per cent. The excise duty cut on inputs will have a little impact, said O P Lohia, CMD, Indoma

Synthetics, as the excise on inputs is modvatable with the excise paid on the product, and a manufacturer has to pay a duty only on the difference.

Cotton Export from India

Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Quantity (in lakh bales of 170 kgs) 16.82 3.50 1.01 0.65 0.60 0.50 0.83 12.11 9.14 47.00 58.00 85.00 50.00 Value (in Rs./Crores) 1655.00 313.62 86.72 52.15 51.43 44.40 66.31 1089.15 657.34 3951.35 5267.08 8365.98 N.A.

These measures do not address the problem being faced by textile exporters, said D K Nair, secretary general, Confederation of Textile Industry. He estimates that textile exports have come down by 5-10 per cent in the last three months, which are likely to fall 10-15 per cent FY 2009-10. Many retail chains and stores are in bad shape. Some garment makers have no orders after April and there are no signs of recovery, says Nair.

A. The excise duty on pure cotton textiles beyond the fibre stage which had been reduced to zero in the stimulus package has been restored to a 4 per cent optional duty. When the excise duty had been reduced to zero, companies with accumulated CENVAT credit were left with no avenue to use that credit. Now, with the excise duty being restored to its earlier 4 per cent optional level, companies will be able to utilise their accumulated CENVAT credit. B. The excise duty on man-made fibres and yarns has been raised to 8 per cent from the earlier level of 4 per cent. While this will increase polyester prices by Rs 2.5 per kg, it will not affect demand as polyester continues to be cheaper than cotton and substitution will continue. C. The extension of 2 per cent interest subvention on pre and post shipment export credit by a period of six months till March 31, 2010, will result in interest costs for exporters declining by around 1 per cent.

Credit Guarantee Fund Scheme for micro and small enterprises

What is a Micro, Small or Medium Enterprise?
The earlier concept of Industries has been changed to Enterprises Enterprises have been classified broadly into: (i) Enterprises engaged in the Manufacture / production of Goods pertaining to

any industry; & (ii) Enterprises engaged in providing / Rendering of services. Manufacturing enterprises have been defined in terms of investment in plant and machinery (excluding land & buildings) and further classified into

- Micro Enterprises
- Small Enterprises

investment up to Rs.25 lakh. investment above Rs.25 lakh & up to Rs. 5 crore investment above Rs. 5 crore & up to Rs.10 crore.

- Medium Enterprises -

Service enterprises have been defined in terms of their

investment in equipment (excluding land & buildings) and further classified into: - Micro Enterprises - Small Enterprises investment up to Rs.10 lakh. investment above Rs.10 lakh & up to Rs.2 crore. investment above Rs. 2 crore & up to Rs. 5 crore

- Medium Enterprises

It is not necessary to engage in manufacturing activity for self-employment. One can set up service enterprises as well . Micro, small and medium enterprises are frequently hailed as the backbone of the economy. There is widespread consensus on their significant contribution to economic growth, employment creation, social cohesion, poverty alleviation and local and regional development. However, a lack of formal credit often hinders small firms from developing their potential. The credit limitation of small enterprises is mainly due to the high administrative costs of small-scale lending, asymmetric information, the high risk attributed to small firms, and their lack of collateral. The fact that small enterprises often receive less finance or face worse conditions than larger firms can put them at a competitive disadvantage and will seriously harm long-term growth and development through

under-investment, a waste of entrepreneurial resources , a reduction of productivity and a lower growth rate. For small and micro enterprises, the limits under the credit guarantee scheme which gives access to working capital and other financial needs have been doubled to Rs.10 million. There are an estimated 13.4 million micro and small enterprises (MSEs) in the country at the end of March 2009, providing employment to an estimated 32.3 million persons. The MSE sector contributes about 39% of the manufacturing sector output and 33% of the nation's exports . Of all the problems faced by the MSMEs, non-availability of timely and adequate credit at reasonable interest rate is one of the most important. The Government attaches the highest priority to supporting the medium, small and micro enterprises (MSMEs) sector which is critical for employment generation. To facilitate the flow of credit to MSMEs, RBI has announced a refinance facility of Rs.7000 crore for SIDBI which will be available to support incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and SFCs.

The following steps are being taken.

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme for Micro and Small enterprises on loans will be extended from Rs.50 lakh to Rs.1 crore with guarantee cover of 50 percent. (b) The lock in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme. (c) Government will issue an advisory to Central Public Sector Enterprises and request State Public Sector Enterprises to ensure prompt payment of bills of

MSMEs. Easing of credit conditions generally should help PSUs to make such payments on schedule. sector. Both the existing and the new enterprises are eligible to be covered under the scheme.

Analysis of Stimulus:
In wake of the economic slowdown and the stimulus package announced by the Government of India, CII conducted a snap poll to analyse the impact of various initiatives, announced as part of the first & second stimulus packages on the Micro, Small & Medium Enterprises (MSMEs). The findings of the snap poll revealed that as part of the First stimulus package, the Reduction in CENVAT by 4 %, followed by Interest rate cut of 0.5% for small and 1 % for micro enterprises by PSU banks, Export support by interest subvention of 2 %, Reduction in lock in period under Credit Guarantee scheme from 24 to 18 months and Additional Plan Expenditure of Rs 20,000 crores, will have a beneficial impact for the MSMEs.

I. Bank credit to MSMEs increases by 26% to Rs.1,91,307 crore as on 31st March 2009:
Credit to Micro and Small Enterprises Source : rbi.org.in Last Reporting Public Sector Private Sector Foreign Banks Friday of As on the Banks March Banks 1 2007 2 1,02,550 3 13,136 4 11,637 (Amount in Rupees crore) All SCBs Percentage of MSE Credit to Net Bank Credit for SCBs* 6

5 1,27,323

7.2

2008 2009(P)

1,51,137 1,90,968

46,912 47,916

15,489 18,188

2,13,538 2,57,072

11.6 11.4

* : As percentage of ANBC or credit equivalent of OBE, whichever is higher, from 2008 onwards. P : Provisional Note: With effect from April 30, 2007, small scale industries have been redefined as MSEs.

Credit to MSME
250000

200000

190968

Amount

150000

151137

100000

102550

Public Sector Banks Private Sector Banks Foreign Banks

50000

46,912

47,916

13,136 11,637

15,489

18,188

0
2007 2008 2009(P)

Year

To facilitate the promotion and development of micro, small and medium enterprises (MSMEs) and enhance their competitiveness, the Government announced a Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) on 10th August 2005 which envisages public sector banks to fix their own targets for funding of MSMEs in order to achieve a minimum 20 per cent year-on-year growth in credit to the MSME sector.

These have resulted in increasing the outstanding credit to micro and small enterprises sector from public sector banks from Rs. 1,51,137 crore as at the end of March, 2008 to Rs.1,91,307 crore as at the end of March 2009. Also as part of the First stimulus package the initiatives such as MSME sector refinance facility of Rs 7,000 crores, PSEs and Government departments to pay promptly to MSMEs, RBI Steps to ease liquidity by reducing repo, reverse repo and CRR, Public sector banks agreed to enhance working capital by 20% payable in one year with six months moratorium and extension of the Credit Guarantee from Rs 50 lacs to Rs 1 crores, would immensely contribute towards easing the liquidity for the MSMEs.

Credit to Sick Micro and Small Enterprises

Source: rbi.org.in

(Amount in Rupees crore)

EndMarch 2008

Total Sick Units

Potentially Viable

Non-viable
No. of Units 6

Viability yet to Units put under be Decided Nursing

No. of Units 10 342 82 140 915 588 1,262 Amount Outstanding 11 234 269 127

No. of Amount No. of Amount Units Out- Units Outstanding standing 1 2006 2007 2008 2 1,26,824 1,14,132 85,186 3 4 5

Amount No. of Amount OutUnits Outstanding standing 7 4,141 4,757 13,462 8 5,082 834 5,147 9

4,981 4,594 5,267 4,287 13,849 4,210

4981,17,148 4281,09.011 247 75,829

II. Performance Evaluation of MSMEs due to Stimulus

Acc. To Economic reports and official statistics of the GOI and other international

Development agencies & Quarterly reports from SIDBI and all PFIs & Reports byinternational rating agencies on SIDBI and all PFIs & Central Bank statistics the position of MSMEs In India is as follow 1. 2. 3. 4. 5. 5% increase in number of MSMEs established over the next 3 years (2008 baseline: 12.8 million MSME units) 5% increase in MSME sector employment over the next 3 years (2008 baseline: 42 million people employed in the MSME sector) 10% growth in number of MSMEs receiving term financing through this project starting from 2010 (2008 baseline for Indian banking sector: 17%) 20% increase in direct lending to MSMEs by SIDBI and the PFIs and overall increase in their MSME portfolio (FY2008 baseline for SIDBI: 37%) At least one successful commercial debt finance or bond issue in international capital market by an Indian commercial public sector bank (2008 baseline: Nil) 6. Number of successful applications by low income women entrepreneurs at SIDBI and SFMC branches increased annually by 20% year (2008 baseline: 5 million)

Cut in Duty of Naphtha for use by power sector:

To provide relief to the power sector, naphtha imported for generation of electric energy has been fully exempted from basic customs duty. This exemption will be available up to 31.03.2009. Notification No.128/2008-Customs dated 07.12.2008 has been issued in this regard

Analysis of Stimulus

National Thermal Power Corporation (NTPC Ltd) says it has generated more power in its gas-based power plants by increasing the use of naphtha, which is cheaper, in place of liquefied natural gas, (LNG) as global demand and prices slid amid the economic slowdown. But sustained use of naphtha would result in high maintenance costs at NTPC plants and reduce their longevity, said the state-owned utility, which boosted the efficiency of its gas-based power projects by 46% through increased use of naphtha. Our aim is to generate power at the cheapest price, with the ultimate beneficiary being the consumer. However, naphtha use will lead to an increase in maintenance costs, said R.S. Sharma, chairman and managing director.While NTPC used to buy 1,500kl of naphtha per day when its plants were operating at 50% efficiency in June this year, it is currently buying 3,300kl of naphtha a day to raise the efficiency of its gas-based plants to 73%.The way crude oil prices have dropped, naphtha prices have also dipped and are expected to come down to 2002-03 levels. This has put pressure on LNG prices, Sharma said. NTPCs total gas requirement is 17 million standard cu. m per day (mscmd) for its gas-based capacity of 3,955MW. Besides, it also has a 1,480MW gas-based power plant through a joint venture.With Nymex crude oil prices coming down to $55.40 (Rs2,767) per barrel from a high $145.31 per barrel on 3 July this year, both LNG and naphtha prices have also declined from a high of $21 per million British thermal units (mBtu) and $28 per mBtu to $15 per mBtu and $9.5-10 per mBtu, respectively.

So the figure clearly denotes the rise of import of naphtha in Dec 2008 over Nov 2008 due to cut in duty of Naphtha.

Export duty on iron ore fines eliminated:

The export duty of 8% on iron ore fines has been withdrawn while the rate of export duty on iron ore lumps has been reduced from 15% to 5% ad valorem. Notification No.129/2008-Customs, and Notification No.130/2008-Customs both dated 07.12.2008 were issued in this regard here today. Export duty in iron ore fines amended to INR 200 per tonne with effect from October 31st 2008 and further to 8% advalorem with effect from November 7th 2008. The export duty on iron ore fines was subsequently withdrawn whereas export duty on all other varieties of iron ore was reduced to 5% advalorem with effect from December 7th 2008.

Analysis of stimuli:
Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported. ron ore exports increased 17 per cent to 12.6 MT in February 2009 from 10.8 MT in the same month a year ago, owing to a moderate revival in demand from Chinese steel producers, as per the latest data compiled by a group of top Indian mining firms.Earlier, according to a study, with the rise in demand for steel in China, India's iron ore exports went up by 38 per cent to reach 13.6 MT in December 2008 against 9.8 MT in December 2007. Around 5060 per cent of Indias iron ore is exported to China.

The Federation of Indian Mineral Industries (FIMI) has revealed that in December 2008, Indian iron ore exports recorded a remarkable increase of 38%, reaching 13.6 Million Tonnes from 9.8 Million Tonnes in December 2007, as reported by Indopia.

During April-December 2008, exports declined by 5.4% to reach 64.47 Million Tonnes from 68.15 Million Tonnes recorded during the same period in 2007. During the first half of December 2008, iron ore exports from India plunged 3.8% on YOY basis. The iron ore exports from India bounced back in December 2008 following a decline since May 2008. This is primarily attributed to the rising demand from the Chinese buyers. Earlier, exports to China were growing slowly since May as the Chinese ports were piled up with the previous stocks. Moreover, the demand hampered as several steel mills closed down in accordance to the Middle Kingdoms reduced industrial operations to bring down the pollution level for the Summer Olympics. But now, with the reopening of some steel mills in China, iron ore demand is surging again. Further, the incentives announced by the Indian government to increase the overseas shipments also pushed the exports up. The government announced to cut the export duty on iron ore, bringing it to 0%, whereas duty on lumps was reduced by 10 percentage points to 5%. This boosted the exports. Reduction in railway freight was also announced by the Indian government, which further added to the growth of Indias iron ore exports. The recovery shown by Indian iron ore exports made the figure for fiscal year 2008-09 appear relatively respectable. Earlier, the exports were predicted to decline by nearly 50% as compared to 104 Million Tonnes in fiscal 2007-08. However, now exports are expected to fall 25%. According to a Research Analyst at RNCOS, Out of its annual production of 207 Million Tonnes, India exports about 104 Million Tonnes of iron ore. Increase in exports of iron ore is proving highly profitable for the Indian exporters. However, situation was quite unfavorable till few months back when economic

recession and high exports tariffs started to show worldwide. Indian Iron Ore Exports Shine, 2009 Forecast Re-evaluated The Federation of Indian Mineral Industries (FIMI) has revealed that in December 2008, Indian iron ore exports recorded a remarkable increase of 38%, reaching 13.6 Million Tonnes from 9.8 Million Tonnes in December 2007, as reported by Indopia. During April-December 2008, exports declined by 5.4% to reach 64.47 Million Tonnes from 68.15 Million Tonnes recorded during the same period in 2007. During the first half of December 2008, iron ore exports from India plunged 3.8% on YOY basis. The iron ore exports from India bounced back in December 2008 following a decline since May 2008. This is primarily attributed to the rising demand from the Chinese buyers. Earlier, exports to China were growing slowly since May as the Chinese ports were piled up with the previous stocks. Moreover, the demand hampered as several steel mills closed down in accordance to the Middle Kingdoms reduced industrial operations to bring down the pollution level for the Summer Olympics. But now, with the reopening of some steel mills in China, iron ore demand is surging again. Further, the incentives announced by the Indian government to increase the overseas shipments also pushed the exports up. The government announced to cut the export duty on iron ore, bringing it to 0%, whereas duty on lumps was reduced by 10 percentage points to 5%. This boosted the exports. Reduction in railway freight was also announced by the Indian government, which further added to the growth of Indias iron ore exports. The recovery shown by Indian iron ore exports made the figure for fiscal year 2008-09 appear relatively respectable. Earlier, the exports were predicted to

decline by nearly 50% as compared to 104 Million Tonnes in fiscal 2007-08. However, now exports are expected to fall 25%. According to a Research Analyst at RNCOS, Out of its annual production of 207 Million Tonnes, India exports about 104 Million Tonnes of iron ore. Increase in exports of iron ore is proving highly profitable for the Indian exporters. However, situation was quite unfavorable till few months back when economic recession and high exports tariffs started to show worldwide.

Export duty on steel industry reduced:

India is the fifth largest producer of steel in the world. India Steel Industry has grown by leaps and bounds, especially in recent times with Indian firms buying steel companies overseas. The scope for steel industry is huge and industry estimates indicate that the industry will continue will to grow reasonably in the coming years with huge demands for stainless steel in the construction of new airports and metro rail projects. The government is planning a massive enhancement of the steel production capacity of India with the modernization of the existing steel plants.

Industry Statistics:
Government targets to increase the production capacity from 56 million tones annually to 124 MT in the first phase which will come to an end by 2011 12. Currently with a production of 56 million tones India accounts for over 7% of the total steel produced globally, while it accounts to about 5% of global steel consumption. The steel sector in India grew by 5.3% in May 2009. Globally India is the only country to post a positive overall growth in the production of crude steel at 1.01% for the period of January March in 2009.

Export:
About 50% of the steel produced in India is exported. Indias export of steel during April December 2008 was 64.4 MT as against 9.7 MT in December 2007. In February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT in the same month last year. More than 50% of steel from India is exported to China. The Governments decision to reduce export duty on iron ore lumps from 15% to 5% has given a major boost to the export of steel. In order to tackle the effects of global financial crisis in the steel sector , India Government has withdrawn all export duties on steel, reintroduced Duty Entitlement Pass Book benefits and imposed 5% import duty on iron and steel items. Hot Rolled Steel has also been brought under restricted category under Indian Trade Clarification Harmonized System of Coding, so as to regulate its cheap imports. The key measures are summarized below: 1. Export duty on steel products withdrawn since October 31st 2008 2 Import duty on steel products re-imposed at 5% from November 18th 2008 3. DEPB on steel items reintroduced since November 14th 2008 4. HR Coil brought under Restricted Category to regulate its imports. The Indian steel industry entered into a new development stage from 200506, resulting in India becoming the 5th largest producer of steel globally. Producing about 55 million tonnes (MT) of steel a year, today India accounts for a little over 7 per cent of the world's total production. India is the only country across the world to post a positive overall growth in crude steel production at 1.01 per cent for the January-March period of 2009. The recovery in steel production has been aided by the improved sales performance of steel companies. The steel sector grew by 5.3 per cent in May 2009. Significantly, state-owned steel maker, Steel Authority of India (SAIL), which reported a net profit of US$ 571 million in January-June 2009, has become the

most profitable steel company globally, beating steel majors such as ArcelorMittal, Posco, Bao Steel and Nippon in the half yearly profits. Out of India's annual iron ore production of more than 200 MT, about 50 per cent is exported. Iron ore exports increased 17 per cent to 12.6 MT in February 2009 from 10.8 MT in the same month a year ago, owing to a moderate revival in demand from Chinese steel producers, as per the latest data compiled by a group of top Indian mining firms. Earlier, according to a study, with the rise in demand for steel in China, India's iron ore exports went up by 38 per cent to reach 13.6 MT in December 2008 against 9.8 MT in December 2007. Around 5060 per cent of Indias iron ore is exported to China. Indias export of steel during April December 2008 was 64.4 MT as against 9.7 MT in December 2007. In February 2009, steel export increased by 17% to 12.6 MT from 10.8 MT in the same month last year. More than 50% of steel from India is exported to China. The Governments decision to reduce export duty on iron ore lumps from 15% to 5% has given a major boost to the export of steel

Interest subvention of two percent on export credit for labor intensive sectors:
Indias textile and clothing exports to the US have declined by over 14% at $1.7 billion in the first four months of 2009 compared to the same period in 2008 due to slump in demand. The Government of India has decided to extend Interest Subvention of 2 percentage points w.e.f. June 01, 2009 till September 30, 2009 on pre and post shipment rupee export credit extended by scheduled UCBs holding AD category I licences, for certain employment oriented export sectors as under: (i) Textiles (including Handloom) (ii) Handicrafts (iii) Carpets (iv) Leather (v) Gems and Jewellery

(vi) Marine Products, and (vii) Small & Medium Enterprises Indias textile and clothing exports to the US declined by 14.09% at $1.78 billion in January-April 2009 compared to $2.07 billion in the same period last year, minister of state for textiles Panabaaka Lakshmi said in a written reply to a question in Rajya Sabha. She said the government announced two stimulus packages on 7 December, 2008 and 2 January, 2009 to boost Indias exports, including textile. The measures announced under these packages include additional allocation of Rs1,400 crore to clear the entire backlog of Technology Upgradation Fund Scheme (TUFS), all handicrafts to be included under Vishesh Krishi and Gram Udyog Yojana and interest subvention of 2% upto September, 2009. Meanwhile, in the Budget 2009, the government extended interest subvention scheme up to March 2010, besides allocating funds worth Rs3,140 crore under TUFS and Rs397 crore for the Scheme for Integrated Textile Park (SITP). Having grown by over 11% in the first six months of 2008-09, the textile exports started falling in October ending the fiscal with overall decline of 10% at $20 billion. As per estimates, slowdown in the US and the European Union, which account for 60% of the countrys textile exports, has caused the sector go through rough times in the form of falling shipments and job loss for over five lakh people in the last few months. The industry is the second largest employer after agriculture, employing 35 million people.

Analysis of stimulus
Due to the global financial crisis, India's export credit as a percentage of net banking credit has shown a declining trend, in turn impacting the country's trade, the Economic Survey has showed.

Export credit as a percentage of net banking credit fell from 5.5 per cent as on March 28, 2008 to 4.6 per cent as on March 27, 2009 and further to 4.1 per cent as on January 15, 2010, it said. The outstanding export credit as on March 28, 2008 was Rs 129,983 crore, a growth of 23.9 per cent over the previous year. But from then on the downward trend started. The export credit as on March 27, 2009 was Rs 1,28,940 crore, a fall of 0.8 per cent from the previous year. On January 15, 2010, it was Rs 1,24,360 crore, a decline of 3.6 from the March 2009 figure.
Export Credit (in crore)
140,000
28 Mar, 2008 , 129,983 27 Mar, 2009, 128,940 15 Jan, 2010 , 124,360

120,000
31 Mar, 2007, 104,910

100,000

80,000

Export Credit (in crore)

60,000

40,000

20,000

0 31 Mar, 2007 28 Mar, 2008 27 Mar, 2009 15 Jan, 2010

E.C as % of Net Banking

7

5.8 5.5

4.6 4.1

E.C as % of Net Banking

0 31 Mar, 2007 28 Mar, 2008 27 Mar, 2009 15 Jan, 2010

Incentives for loans on housing:

Housing is a potentially very important source of employment and demand for critical sectors and there is a large unmet need for housing in the country, especially for middle and low income groups. The Reserve Bank has announced that it will shortly put in place a refinance facility of Rs.4000 crore for the National Housing Bank. In addition, one of the areas where plan expenditure can be increased relatively easily is the Indira Awas Yojana. As a further measure of support for this sector public sector banks will shortly announce a package for borrowers of home loans in two categories: (1) upto Rs.5 lakhs and (2) Rs 5 lakhRs 20 lakh. This sector will be kept under a close watch and additional measures would be taken as necessary to promote an accelerated growth trajectory.

Special Schemes for Housing Loans:

The Public Sector Banks have decided to offer the following two schemes for home loan borrowers. The Schemes will be applicable to all new Housing Loans availed upto 30th June, 2009 and shall not apply to swapping of loans. I. Loans up to Rs.5 lakh for a maximum period of 20 years (I) The interest rate will not exceed 8.5 % per annum for the first 5 years. Should there be a home loan product at a lesser rate, that bank will match this rate for products under their scheme. The rate of interest shall be reset after 5 years from the date of drawal of the first installment and the borrower will then have the option for going for a fixed rate or a floating rate of interest. (ii) A margin of 10% only will be required. (iii) There shall be no processing charges. (iv) There shall be no pre-payment charges/penalty. (v) Free Life Insurance cover for the entire amount of outstanding loan will be provided to the borrower. II. Loan from Rs.5 lakh to Rs.20 lakh for a maximum period of 20 years (i) The interest rate will not exceed 9.25% per annum for the first 5 years. Should there be a home loan product at a lesser rate, that bank will match this rate for products under their scheme. The rate of interest shall be reset after 5 years from the date of drawal of the first installment and the borrower will then have the option for going for a fixed rate or a floating rate of interest. (ii) A margin of 15% only will be required. (iii) There shall be no processing charges. (iv) There shall be no pre-payment charges/penalty (v) Free Life Insurance cover for the entire amount of outstanding loan will be provided to the borrower.

Analysis of Stimulus:
1. On Rate Of Interest:

On December 22, Public sector banks had brought cheer to small home loan seekers by cutting rates last week under a new package aimed at stimulating demand in the retail housing sector. Loans up to Rs 20 lakh will now be available at 8.5-9.25 per cent a year for tenures up to 20 years.The offer will be valid only for new loans up to June 30, 2009. Currently, the interest rate on these loans average around 10 per cent for most PSU banks.

HDFC, Indias largest housing finance company, will offer floating

interest rate home loans of up to Rs 20 lakh, and above Rs 20 lakh at 10.25 per cent and 11.25 per cent respectively with effect from December 22. Public sector banks had reduced their rates to 8.5-9.25 per cent earlier this week, for home loans up to Rs 20 lakh. Currently, HDFC, irrespective of the quantum of home loan, charges an average floating interest rate of 11.75 per cent. The 50 basis points reduction in HDFCs retail prime lending rate (RPLR) to 14.5 per cent will also benefit the existing borrowers. Since all floating rates are linked to RPLR, existing borrowers, depending on their profile, will now pay interest rates between 11 and 12.25 per cent, that is, 225-350 basis points below RPLR of 14.5 per cent. Comparatively, LIC Housing Finance, which cut interest rates on home loans with effect from December 17, is offering floating interest rate loans a tad cheaper. A home buyer can avail himself of loans up to Rs 20 lakh for five-year tenure at 9.25 per cent. Loans of more than five years duration are available at 9.75 per cent. For loans above Rs 20 lakh, LICHF floating interest rate home loans will vary in the 11-11.25 per cent range, depending on the profile of the customers. Before the revision, the company had an uniform lending rate of 11.5 per cent irrespective of the amount and the duration.

2. On Market For Home Loan

The market for home loans had buzzed again. Both the leading players State Bank of India (SBI) and Housing Development Finance Corporation (HDFC) have seen a significant improvement in their loan approvals during the first half of this financial year 2009-10. While for SBI, approvals of home loans has reportedly increased by 25% to Rs 11,000 crore for the first half of the financial year, 2009-10 compared to the corresponding period last year, for HDFC, approvals have gone up 18% at Rs 28, 418 crore compared to Rs 24,180 crore during the corresponding period last year. SBI is slated to announce its results today. Countrys largest bank expects a growth of 30% in loan approvals by the end of this year. It expects to sanction around Rs 25,000 crore by the end of this financial year while HDFC is planning to grow in both approvals and disbursals by 20% during the current year. The return of strong numbers in the home loan market is a result of renewed buying interest by the middle class, after the setback of 2008-09. Developers are making a pitch for affordable housing that is attracting buyers. The softening of interest rates has also led to the rise in demand. The current floating rate for HDFC stands at 8.75% for loans up to Rs 15 lakh, 9% for loans in the range of Rs 15 lakh to Rs 50 lakh and for loans above Rs 50 lakh, the interest rate is 9.5%. The numbers will also signal a return of better economic performance in the economy that has seen consumer confidence ebbing for the last two quarters. Between them, State Bank of India and HDFC make up for more than 50% of the market for home loans. HDFC accounts for about a third of the market. The rest of the market share is divided between housing finance companies and other scheduled commercial banks. Despite being a late entrant, SBI has rapidly climbed the market share ladder by aggressively pitching its low interest rates that start at 8%.

Full refund of service tax paid by exporters to foreign agents

Representations have been received from exporters, seeking clarification whether ten per cent of free on board (FOB) value of export goods allowed as foreign agency commission vide Notification 41/2007-ST dated 06/10/2007 as amended, has been reduced to one per cent vide Notification 18/2009-ST dated 07/07/2009 . Refund of Actual Service Tax paid on Foreign Agency Commission Cap on foreign agency commission has been raised from 2% to 10% vide Notification No. 33 2008-ST dated 7th December 2008. Against this, exporters made following requests:

Cap on agency commission should be removed. Notification No.17-2008-ST dated 1/4/2008 covers foreign agency commission for agents located abroad only. This may also include agents of foreign buyers / buying houses located in India for purposes of refund of service tax.

The stipulation that refunds must be claimed within 6 months (as per Notification No. 32-208-ST dated 18th November 2008) from the date of export, should be done away with for agency commission in particular since payments to agents are made after receipt of remittance.

Member (Service Tax) promised to examine these requests but stated that as per the Notification service tax on foreign agency commission to agents of foreign buyers / buying houses located in India was not refundable. on this, FIEO suggested that refund of service tax to agency commission paid to principals of foreign agents located in India should be considered. FIEO further suggested that the time limit for filing service tax claim should be six months from the date of payment of service tax or realization of export proceeds, whichever is later.

The current rate of service tax being ten per cent and the maximum allowable limit of foreign agency commission being ten percent of FOB, one percent of the FOB value of export goods is the maximum exemption of service tax. To settle all doubts to rest, for the purpose of service tax refund, maximum allowable foreign agency commission on export goods continues to be at the pre-budget level of ten percent of the fob value of export goods till further changes are notified.

Analysis of Stimulus
Service tax refund fails to cheer exporters
DESPITE the continuous increase in the list of services for which exporters would be given refunds, many exporters were not enthused. The exclusion of exporters claiming duty drawback (a scheme reimbursing exporters a part of the duties on inputs) from getting refunds of service tax has disappointed a large section of exporters. Moreover, the mandatory requirement of registration of exporters with the excise department for claiming refunds and other procedural snarls has given rise to complaints, especially from merchant exporters. The restrictive clauses in the refund provision of service tax on commission paid to foreign agents has also done its bit in taking the fizz out of the incentive. Speaking to ET, commerce department officials pointed out that the government had made provisions of increasing the drawback amount claimed by exporters by 0.4% of the FOB value of exports, but it is not enough. In a number of cases, exporters end up paying much more as taxes on services than the provision made in the drawback. That is why, exporters are feeling shortchanged, an official said. According to Delhi Exporters Association president SP Agarwal, a number of services like courier are not related to the export value of goods. There is no justification for clubbing service tax refund with duty drawback. We want the government to give all exporters separate refunds for service tax, he said. Till date, the finance ministry has passed notification for refunding exporters taxes paid on 16 services. These include port services, transport of goods by road and railways, general insurance, technical testing & analysis, storage & warehousing, business exhibition services and specialised

cleaning services. Taxes on commission paid to foreign agents and banking charges are the latest addition on the exemption list. However, exemption of tax on commission paid to foreign agents comes with a rider. The fineprint says the refund would be based on either the actual amount of service tax paid or 2% of the service tax on FOB, whichever is lesser. Since exporters of products such as textiles and pharmaceuticals pay about 10-15% commission to foreign agents, a 12.5% service tax charged on the commission works out to be around 1.8% of the value of exports. On the other hand, 2% of the service tax on FOB, amounts to only 0.25% of the value of exports.

Short comings Of Stimulus Package:

When the government announced the first instalment of the fiscal stimulus package, the general reaction was it is not enough! There was another package that's expected to. Exporters, left out of the last package, are expected to benefit, as are auto component manufacturers.

I. Declining export values

Figures for the dollar value of exports during the month of March 2009, point to a 33.3 per cent decline in export values relative to the corresponding month of the previous year. This is the fifth consecutive month in which the month-on-month growth rate has been negative, and the one in which the fall in exports has been the largest.

Indias exports over financial year 2008-09 stood at $168.70 billion which was just 3.4 per cent higher than in 2007-08. This compares with 23-31 per cent annual growth rates over the previous four years. Given the structure of Indias exports, it is to be expected that this deceleration in export growth would have affected output growth in a range of traditional and modern manufacturing sectors that have contributed to the export revival of recent years. The other area where the effect of the crisis is visible is capital inflows. With foreign investors having to reduce their credit dependence and meet commitments at home, they have been booking profits or selling assets in emerging markets to mobilise the requisite funds. This affected India as well during the last financial year.

Exports of Item Private Final Consumption Expenditure Government Final Consumption Expenditure Gross Fixed Capital Formation Net Exports Year-on-Year Growth Rate (%) Private Final Consumption Expenditure Government Final Consumption Expenditure Gross Fixed Capital Formation Net Exports

Q1 4.5

Q2 2.1

Q3 2.3

Q4 2.7

Full year 2.9

(-) 0.2

2.2

56.6

21.5

20.2

9.2

12.5

5.1

6.4

8.2

(-) 75.9 (-) 62.1 (-) 75.4 (-) 30.8 (-) 41.2 Share in GDP (%) 58.0 55.5 57.4 51.4 55.5

9.6

8.3

12.5

13.4

11.1

32.2

34.5

30.9 (-) 8.5

31.6 (-) 2.9

32.2 (-) 5.8

(-)1.3 (-)10.5

Source: Central Statistical Organisation (CSO).

II. Portfolio Investment

As compared with a net inflow of portfolio investment of $29.4 billion in 2007-08, India experienced a net portfolio investment outflow of $13.9 billion in 2008-09. Though direct investment inflows remained high at $33.6 billion, they were lower than the $34.4 billion recorded in 2007-08, resulting in a total net foreign investment inflow of just $19.6 billion in 2008-09 compared with $63.8 billion in 2007-08. Even though there has been a sharp increase in FII inflows in recent weeks, there is reason to believe that such inflows are the result of speculative allocation

decisions across geographies on the part of investors with limited funds. Since they reflect attempts to squeeze out as much as possible from still-tepid global markets, such flows are potentially extremely volatile.

III.

Industrial growth. The month-on-month annualized rate of growth

of industry, as reflected by the index of industrial production, points to a sharp deceleration and subsequent contraction of output in the organized industrial sector.

As Chart 1 shows, month-on-month rates, which indicated a slackening of industrial growth during the first two quarters of 2008-09, point to significant worsening of industrial performance leading to negative growth rates during the subsequent two quarters.

Activity

Financial Year

Quarterly Growth Rates (y-o-y): 2008-09

2007-08 2008-09 Q1 Q2 Q3 Q4 (Apr-Jun) (Jul-Sep) (Oct-Dec) (Jan-Mar) Agriculture 4.9 1.6 3.0 2.7 (-) 0.8 2.7

Industry

7.4

2.6

5.1

4.8

1.6

(-) 0.5

Services Overall GDP

10.8 9.0

9.4 6.7

10.0 7.8

9.8 7.7

9.5 5.8

8.4 5.8

Source: Central Statistical Organisation (CSO).

IV. Portfolio capital

The other important means through which the global crisis is possibly affecting India is through the reversal of portfolio capital flows to the country, which had been massive during the period of the high, near-9 per cent growth it experienced over almost five years.

The immediate impact of that reversal was a collapse of the stock market boom and a depreciation of the rupee. The first of these could have had wealth effects that affected demand adversely, besides having created cash flow problems for a number of entities. If, for example, a firm had borrowed against securities, the fall in the value of collateral would have given rise to calls that would have stretched their resources. The other side of this is the greater difficulty firms would face in accessing credit. The depreciation of the rupee, on the other hand, would have increased the rupee costs borne by firms and agents who had borrowed from the international market in the past and had to meet interest and amortisation commitments in

foreign exchange. Given the sharp increase in private external commercial borrowing in recent years, this too would have stretched available resources, affecting demand and production and even threatening bankruptcy. Finally, all of this would have also affected the state of liquidity in the system and more importantly the willingness of banks to lend. This would not only have impacted adversely on firms, but also on credit-financed housing investment, automobile purchases and consumption. These credit-financed sources of demand had expanded significantly in recent years, with advances for such purposes having increased sharply in absolute terms and as a share of total advances. Hence, the credit retreat (rather than squeeze) would have played an important role in triggering the recession.

Impact of Stimulus On Government Revenue:

Fiscal Situation of the Central Government (% of GDP) Item 2007-08 (Actual) 12.6 15.1 12.6 1.8@ 2.7 1.1 (-) 0.9 2008-09 (RE) 11.8 16.9 15.1 1.8 6.2* 4.6* 2.6 2009-10 (BE) 10.9 17.4 15.3 2.1 6.8 4.8 3.0

1. Gross Tax Revenue 2. Total Expenditure Revenue Expenditure Capital Expenditure 3. Fiscal Deficit 4. Revenue Deficit 5. Primary Deficit

Source: rbi.org.in * As per provisional accounts released by the

Controller General of Accounts. @ Net of acquisition cost of the Reserve Banks stake in State Bank of India. As a result of fiscal stimulus measures, coupled with the reduction in the taxGDP ratio, all the deficit indicators deteriorated sharply and deviated significantly from the targets stipulated under the Fiscal Responsibility and Budget Management (FRBM) Rules. The fiscal deficit increased from 2.7 per cent of GDP in 2007-08 to 6.2 per cent (pre-actual) in 2008-09. Of the increase in fiscal deficit due to the stimulus measures (3.5 per cent of GDP), a major portion (3.3 percentage points) has been on account of increase in expenditure. The revenue deficit also went up from 1.1 per cent of GDP in 2007-08 to 4.6 per cent in 200809. The primary surplus in 2007-08 turned into a deficit in 2008-09. The consolidated fiscal deficit of the States for 2008-09 is expected to have risen to 3.0 per cent of GDP taking the estimated combined deficit of the Centre and the States to 9.1 per cent of GDP, a level last seen in 2002-03. Including the issuance of bonds to oil marketing and fertiliser companies, the combined deficit for macroeconomic purposes adds up to around 10.9 per cent of GDP in 200809. Owing to the fiscal stimulus packages as also additional post-budget items of expenditure, the combined net market borrowings of the Central and State Governments in 2008-09 were nearly two and

Conclusion
The stimulus package resulted in tremendous pressure on the fiscal deficit, thereby in part nullifying the beneficial effects. The various stimulants of the package such as the across-the-board cut of four per cent in VAT, export and Customs duty concessions and full refund of service tax paid by exporters to foreign agents may well cause a loss of revenue of the

order of Rs 10,000 crore or more. This had, however, made cheaper a whole range of products, from cars and two-wheelers to steel and appliances, all of which are experiencing a slowdown in demand.

Add to this the market borrowing of Rs 45,000 crore announced by the Government, and the fiscal deficit is all set to jump from Rs 1,33,287 crore (or 2.5 per cent of GDP) as estimated in the Budget for 2008-09 to Rs 1,88,287 crore or 3.6 per cent of GDP.